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Kale Inc. forecasts the free cash flows (in millions) shown below. Assume the firm has zero non-operating assets. If the weig
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Answer #1

The firm's value is computed as shown below:

= Free cash flow in year 1 / (1 + weighted average cost of capital )1 + Free cash flow in year 2 / (1 + weighted average cost of capital )2 + 1 / (1 + weighted average cost of capital )2 [ ( Free cash flow in year 2 (1 + growth rate ) / ( weighted average cost of capital - growth rate ) ]

= - $ 50 / 1.11 + $ 115 / 1.112 + 1 / 1.112 [ ( $ 115 x 1.05 ) / ( 0.11 - 0.05 ) ]

= - $ 50 / 1.11 + $ 115 / 1.112 + $ 2,012.5 / 1.112

= $ 1,682 millions Approximately

So, the correct answer is option e.

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